CLASS:XII

SUBJECT:MACROECONOMICS

NATIONAL INCOME AND RELATED AGGREGATES

National income is a money measure of the value of all goods and services produced in a year by a nation.

• It is Net National Product (NNP) at Factor Cost (FC)
• It does not include taxes, depreciation and non-factor inputs (raw materials)

Domestic Income – Total value of final goods and services produced within a domestic territory during an accounting year, after adjusting depreciation.

• It is NDP at FC
• Both NNP and NDP can be measured at constant prices (real income) or market prices (nominal income)
• Domestic Income + NFIA = National Income

Q1. Define real GNP.

Answer: Gross national product is calculated at constant prices i.e., via base year price is known as real GNP in economics.

Q2. What is national disposable income?

Answer: National disposable income is that type of an income which is obtainable to the whole economy .

1.  NNP:If we deduct depreciation from gross product we obtain net product. GDP minus depreciation is called NNP. NNP is sometimes called national income.

NNP = GNP – depreciation

2. GDP:GDP measures the aggregate money value of output produced by the economy over a year.

GDP at factor cost = GDP at market prices – indirect taxes (T) + subsidies (SU )

3. GNP includes GDP plus net property income from abroad. Thus, GNP includes incomes that nationals earn abroad, but it does not include the incomes earned by foreign nationals.

GNP = GDP + net property income from abroad.

Measurement of National Income

There are three methods to measure national income:

Methods to Measure National Income
S.No	Measurement Method
1.	Income Method
2.	Production (Value-Added) Method
3.	Expenditure Method

• Measurement of National Income – Expenditure Method

The expenditure method to measure national income can be understood by the equation given below:

Y = C + I + G + (X-M),

where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X = Exports, I = Imports, X-M = Net Exports

Capital	Net Investment
Capital is tied to liquidity	Investment is tied to equity
Capital is a stock variable	Net Investment is a flow variable
Capital is on the liabilities side of the balance sheet	Investment is on the assets side of the balance sheet

• Expenditure

The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable to economists, because, like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output takes all the different areas in which money is spent within the region, and then combines them to find the total output.

${\displaystyle \mathrm {GDP} =C+G+I+\left(\mathrm {X} -M\right)}$

where:

C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

• Equilibrium level of national income

CLASS 12TH
SUBJECT:MACROECONOMICS

BASIC CONCEPTS OF MACROECONOMICS

 Types of Investment:

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment. Similarly demand also influences it. When income increases, consumption de­mand also increases and to meet this, investment increases. In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income, as shown in Figure 1.

• Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.
• Macro economics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.
• 

• FINAL GOODS AND INTERMEDIATE GOODS

Final Goods Vs Intermediate Goods:

BASIS	FINAL GOODS	Intermediate Goods
Meaning:	Final goods refer to those goods which are used either for consumption or for investment.	Intermediate goods refer to those goods which are used either for resale or for further production in the same year.
Nature:	They are included in both national and domestic income.	They are neither included in national income nor in domestic income.
Demand:	They have a direct demand as they satisfy the wants directly.	They have a derived demand as their demand depends on the demand for final goods.
Value addition:	They are ready for use by their final users i.e. no value has to be added to the final goods.	They are not ready for use, i.e. some value has to be added to the intermediate goods.
Production Boundary:	They have crossed the production boundary.	They are still within the production boundary.
Example:	Milk purchased by households for consumption, car purchased as an investment.	Milk used in dairy shop for resale, coal used in factory for further.

How to Classify Goods as: Intermediate Goods and Final Goods:

The distinction between intermediate goods and final goods is made on the basis of the use of product and not on the basis of product itself. A commodity can be an intermediate good as well as a final good, depending upon its nature of use.

For Example:

(i) Sugar is an intermediate good when it is used for making sweets. However, if it is used by the consumers, then it becomes a final good.

(ii) Similarly, milk is an intermediate good when it used in dairy shops for resale. However, it becomes a final good when it is used by the households.

• DIFFERENCE BETWEEN CONSUMPTION GOODS AND FINAL GOODS

Basis	Consumption Goods	Capital Goods
Satisfaction of Human wants	These goods satisfy human wants directly. So, such goods have direct demand	Such goods satisfy human wants indirectly. So, such goods have derived demand
Production Capacity	They do not promote the production	They help in raising production capacity
Expected Life	Most of the consumption goods (except durable goods) have limited expected life	Capital goods generally have an expected life of more than one year

• DIFFERENCE BETWEEN DEPRECIATION AND CAPITAL LOSS

Basis	Depreciation	Capital Loss
Meaning	It refers to the fall in the value of fixed assets due to normal wear and tear, the passage of time or outdated technology	It refers to the loss in value of the fixed assets because it is outdated
Provision for loss	Provision is made for replacement of assets as it is an expected loss	No such provision is made in case of capital loss as it is an unexpected loss
Production Process	It does not hamper the production process	It hampers the production process

•  INVESTMENT

In simple terms, Investment refers to purchase of financial assets. While Investment Goods are those goods, which are used for further production.

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment.  In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income.

2. Autonomous Investment:

Autonomous investment is independent of the level of income and is thus income inelastic. It is influenced by exogenous factors like innovations, inventions, growth of population and labour force, researches, social and legal institutions, weather changes, war, revolution, etc

Gross Investment:-Gross investment includes the total of all investments made in a country during one year.

Net Investment:-Net investment equals gross investment, minus annual wear and tear.

Indirect taxes

Indirect taxes are those imposed by a government on goods and services, in contrast to direct taxes, such as income and corporation tax, which are levied on incomes of households and firms. Indirect taxes are also called expenditure taxes.

Factor Payment (Income):

1. It comprises rent, wages, interest and profit.

2. It is received in return for rendering productive service.

3. It is an earned income (earning concept).

4. It is bilateral payment.

5. It is included in national income.

Transfer Payment (Income):

1. It comprises gifts, subsidies, donations, scholarships, etc.

2. It is received without providing any good or service in return.

3. It is an unearned income (receipt concept).

4. It is unilateral payment.

5. It is not included in national income.

CIRCULAR FLOW OF INCOME

GRADE 12TH

SUBJECT:MACROECONOMICS

CIRCULAR FLOW OF INCOME

MEANING OF CIRCULAR FLOW OF INCOME

CIRCULAR FLOW OF INCOME REFERS TO GENERATION OF INCOME AND EXPENDITURE FROM HOUSEHOLDS TO FIRMS IN THE FORM OF CONSUMPTION EXPENDITURE ON GOODS AND SERVICES PRODUCED BY THEM.

PHASES OF CIRCULAR FLOW OF INCOME

1. GENERATION
2. DISTRIBUTION
3. DISPOSITION

STOCK AND FLOW

1. STOCK

STOCK VARIABLE REFERS TO THE VARIABLE , WHICH IS MEASURED AT A PARTICULAR PERIOD OF TIME .

  2.  FLOW

FLOW VARIABLE REFERS TO THE VARIABLE , WHICH IS MEASURED OVER A PERIOD OF TIME.

Basis	Stock	Flow
Time Dimension	There is no time dimension	Time dimension exists as the magnitude can be scaled over a period of time
Nature of concept	It is a static concept	It is a dynamic concept
Examples	Total number of Hero Honda bike in Bangalore National Wealth	Hero Honda Car manufactured during February 2018 National Income

TYPES OF CIRCULAR FLOW

1. real flow
2. money flow

• Real Flow- The term real flow means the flow of factor services from household to firms. Similarly, the flow of goods and services from firms to household

• Money Flow- The Money flow refers to the flow of factor payments from firm to household for factor services. Similarly, the flow of consumption expenditure from household to firm for the purchase of goods and services manufactured by the firm.

Government sector performs the following activities in the economy.

• They collect taxes from households and firms
• They make transfer payments to the households and provides subsidies to the firms
• They make the payment for the purchase of goods and services from the firms
• They save and borrows money with the help of the financial market.

Circular Income Flow in a Two Sector Economy:

The outer circle represents real flow and the inner circle represents the monetary flow. Real flow indicates the factor services flow from household sector to the business sector, and goods and services flow from business sector to the household.

• The state of equilibrium in the two-sector economy is defined as a situation in which no change occurs in the levels of income (Y), expenditure (E), and output (O).

i.e. Y=E=O